Goverment Spending & Deficit Concerns: A Look at Slovakia‘s Finances
Slovakia’s government has implemented consolidation measures aimed at improving public finances, but their impact is being offset by new and increased spending, according to recent analysis.
The initial round of fiscal adjustments, approved alongside the first consolidation package in late 2023, included a full 13th monthly pension payment, the creation of a new Ministry of Tourism, increased funding for sports initiatives, and substantial co-financing for healthcare.Last year also saw increases in spending related to stabilization contributions for the police and military, adding 0.2 to 0.3 percent to the annual GDP deficit. This year, further expenditure has been allocated to healthcare infrastructure, specifically the construction of a new hospital in Vajnory and the renovation of the hospital in Prešov. Additionally, wage valorization in the education sector proved more substantial than initially projected.
A key point of discussion revolves around the impact of the EUR 800 one-time payments issued to public sector employees this year. The government argues this payment doesn’t represent a net increase in fiscal burden compared to a standard policy of unchanged wages, as it functioned as a substitute for conventional wage valorization. The cost of the reward was roughly equivalent to, or even slightly less than, what valorization would have cost.Therefore, it wasn’t considered a new fiscal strain in the same way as the newly implemented measures.
The initial consolidation measures enacted for 2024 were projected to yield EUR 1.7 billion in savings.Though, the effectiveness of these measures is diminishing over time. This is notably true for elements of the first consolidation package, which included temporary adjustments.These included raising health contribution rates for the self-employed from 14 to 15 percent, reducing the levy on the second pillar of the pension system, and implementing a bank levy.
The impact of these three measures is decreasing as the health levy is fixed for only four years, concluding in 2027, and the bank levy is also scheduled to decline. While reducing the levy on the second pillar provides a short-term benefit to the state budget, it’s expected to lead to increased pension costs in the long run as individuals accumulate less savings. This means the consolidation efforts don’t represent a permanent fix for public finances.Without the initial consolidation measures, Slovakia’s deficit would likely be even larger. Analysts estimate that, absent both the consolidation efforts and the subsequent new expenditures, the deficit would be 6.5 percent of GDP this year, compared to the current projection of 5.1 percent.
While consolidation is proving helpful, the introduction of permanent expenditures has significantly weakened its impact. This represents a missed opportunity for more substantial and lasting improvements to public finances.
The question arises whether avoiding the 13th pension and other permanent spending increases would have eliminated the need for a third round of consolidation measures.
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